Merchant-Funded Rewards Make Cards Cheaper for CUs

A majority of the credit unions around the country that issue cards will soon be able to offer merchant-funded rewards.

FIS, the credit and debit card processor for the majority of card-issuing credit unions, is adding some merchant-funded rewards to its existing ScoreCard rewards program.

Merchant-funded rewards programs allow merchants to directly reward consumers who use a participating card issuer’s credit or debit card. The programs are not the core of a credit union's loyalty or incentive regime, but are most often an add-on meant to enhance the appeal of the card for a given period of time or to a group of targeted cardholders.

They have gained particular popularity among debit card issuers as they seek ways to cut the costs of incentive programs in the face of a looming debit interchange cap.

Merchant-funded rewards are not new according to industry sources, but they have most often been confined to online transactions or to a relatively small number of CUs that cultivate relationships with local retailers or other merchants. They have been growing steadily in popularity, however, as both card issuers and merchants leverage existing commercial relationships into greater profitability and FIS’ move positions them for even more attention and market share.

FIS' offering, dubbed ScoreMore Rewards, is an overlay of the processor’s current ScoreCard program. It repays cardholders for using their credit and debit cards at certain national, regional and local retailers. The card-issuing financial institution will also be able to earn rewards when its cardholders use their cards with those retailers, the processor said.

"The Durbin Amendment has made it very difficult for financial institutions to offer loyalty programs to their customers due to the reduction of interchange revenue," said Frank D’Angelo, executive vice president of FIS Payment Solutions Group. "The new ScoreMore Rewards program takes the burden of offering a loyalty program off the shoulders of the financial institution and provides them with the means to offer a new and exciting program for their customers–all at no cost to them."

The FIS offering may be especially attractive to credit unions because it promises to remove some of the procedural headaches merchant-funded rewards often carry, especially following up to make sure the merchant honors its rewards commitment.

Also, because FIS is both a card processor and coordinator in the program, it can help credit unions make the most of their merchant-funded reward opportunities.

Robert Legters, vice president of loyalty services for FIS, attributed the growing popularity of merchant-funded rewards programs to the economic dynamic that benefits both card issuers and retailers.

Merchants help fund card reward programs because they serve as a way for them to both cut and target their marketing costs, Legters explained. Credit unions and card issuers like them because they help boost their cards’ popularity.

"Remember, a merchant funding rewards points only pays the points if a customer actually purchases a product subject to the reward," Legters said. In effect, this lets the retailer put marketing dollars in a program with proven results, he explained, adding that merchants saw this practice as more efficient than buying advertising and hoping to draw sales from people who saw the ads.

But this also means that for merchants to be more interested in the program, they need to be confident the rewards offer will be made primarily to targeted cardholders.

For example, a regional home repair or hardware chain might be interested in offering a merchant-funded reward if it knew that the reward would be offered first or even primarily to card holders who had used their cards at a home repair or hardware store at least once in the last six months. That level of sophistication in cardholder data is beyond many small card issuing credit unions but will be within reach of FIS as both the card processor and rewards administrator.

Legters stressed that merchant-funded rewards are one part of the overall effort to keep CUs armed in the fight to get their cards the coveted ‘top of wallet’ status but it will not replace lost debit interchange income entirely. Still, he pointed out that all interchange is in effect a volume business and anything that will lead to a credit union member reaching for their CU-issued card–without the CU having to pay more for it–is a good thing.